Exclusive: Goldman writedown of Portugal loan hurts profit, bonuses

NEW YORK (Reuters) - Goldman Sachs Group Inc had to write down its loan to the troubled Portuguese bank Banco Espirito Santo SA in the fourth quarter, cutting the bank’s profit and some employees’ bonuses, people familiar with the matter told Reuters.

Traders work on the floor of the New York Stock Exchange near the Goldman Sachs stall July 16, 2010. REUTERS/Brendan McDermid

The writedown came late in the quarter after a Dec. 22 decision by Portugal’s central bank that effectively wiped out certain Banco Espirito Santo creditors.

On Christmas Eve, a group of senior Goldman executives held a conference call to discuss the writedown and how it would affect employee bonuses, people familiar with the matter said. About 15 to 20 people worked on the Banco Espirito Santo deal, but because of the way Goldman structures its bonuses, up to 50 people in the broader group will be affected.

Goldman and some of its clients lent Banco Espirito Santo $835 million in July using an entity it created called Oak Finance Luxembourg SA. The Bank of Portugal stepped in with a 4.4 billion euro ($5.2 billion) bailout of Banco Espirito Santo in August and split it into two parts - a new, healthy bank called Novo Banco, and a legacy entity that is being wound down.

Banco Espirito Santo’s collapse came after it unveiled losses on loans made to an assortment of companies run by its founding family. The broader Espirito Santo group, which included tourism, health and agriculture companies, sought bankruptcy protection and began liquidating last year. Portuguese prosecutors have since launched an investigation into the company’s collapse. New management put in place at Banco Espirito Santo by the central bank has said they suspect the lender engaged in illegal behavior.

Goldman officials believed that the Oak Finance loan would be protected in the new structure, in part because a senior Bank of Portugal official said so in writing, Goldman spokeswoman Fiona Laffan said. But on Dec. 23, Novo Banco said in a regulatory filing that the Bank of Portugal decided not to transfer the Goldman-backed loan to the new entity.

As a result, the prospects of Goldman and its clients being repaid have dimmed and Goldman’s finance staff had to write down the value of the loan.

It could not be learned how much of the $835 million loan came directly from Goldman Sachs, how big the writedown was, or how much bonuses would be affected. Laffan declined to provide those details, as did other sources who requested anonymity because they were not authorized to discuss the matter publicly.

It’s not clear who at Goldman Sachs had chief responsibility for originating and structuring the loan to Banco Espirito Santo, though such a commitment typically has to move through the firmwide capital committee, which includes senior executives like Chief Financial Officer Harvey Schwartz and Chief Risk Officer Craig Broderick.

Those involved with the loan at Goldman came from the securities division, as well as the financing group, which sits within the investment banking division. The securities business is overseen by co-heads Isabelle Ealet, Pablo Salame and Ashok Varadhan, while the financing business is overseen by co-heads Jim Esposito and Marc Nachmann.

Vice Chairman Michael Sherwood and Co-Head of Investment Banking Richard Gnodde, who together run Goldman Sachs International, were also apprised of developments regarding the Banco Espirito Santo loan.

One person said the earnings effect of the writedown isn’t “material,” meaning the bank will not have to disclose it in detail on Friday when it announces results. Goldman hedged its exposure to the loan, which helps reduce the potential for losses.

But another source said Goldman was the “lead” participant - meaning it provided the biggest chunk of financing - and that it wasn’t able to distribute as much of the loan as it initially planned because Banco Espirito Santo’s finances deteriorated so rapidly.

Goldman has said “multiple investors” participated in the loan, including pension funds. After the Bank of Portugal’s decision, Goldman said it would pursue “all appropriate remedies” to recoup money for itself and its investors, unless the central bank changed its mind.

The reduction in bonuses due to a bad bet on Banco Espirito Santo comes at a time when many traders are already expecting lower bonuses.

In a report on Tuesday, Barclays analyst Jason Goldberg said he expects Goldman to say it paid out less revenue to employees last year to ensure that profits for shareholders are at reasonable levels. On average, analysts expect the bank to report earnings of $4.35 a share for the fourth quarter, versus $4.60 a share a year earlier.

Trader bonuses at Citigroup Inc will be down 5 percent to 10 percent compared with 2013, after market tumult in the last two weeks of the year hurt revenue, Reuters reported last week. Bank of America Corp is also reducing bonuses for investment banking and trading staff, the Wall Street Journal reported.

Pay consultants say they expect overall bonuses in the banking sector to be flat-to-down.

Reporting by Lauren Tara LaCapra; editing by Dan Wilchins and John Pickering